OpenTable Taps Mobile To Drive Meal Reservations

Like a popular new restaurant, OpenTable (OPEN) enjoyed a strong two-year run from the time it went public in May 2009. Then the tables turned.

OpenTable is the top provider of online restaurant reservation services. At quarter's end, it had ties to 18,975 restaurants in North America and 7,385 internationally, mostly in the United Kingdom.

From its IPO price of 24.50, the stock hit a high of 118 nearly two years later while logging double-digit revenue growth and even higher profit gains.

OpenTable is the top provider of online reservations for restaurants such as the Waterbar in San Francisco. AP View Enlarged Image

But then the troubles started, sending shares to under 32 by the end of 2011. They've moved up more recently to around 52 as mobile reservations have shot up, but are still 56% off their all-time high.

CEO Exit

What happened? First, like a restaurant that had its star chef walk out, OpenTable's chief executive, Jeff Jordan, left unexpectedly in May 2011 to a venture capital firm.

Later, the company shuttered its discount deal program known as Spotlight, which never gained much traction.

More troubling, OpenTable's international business, led by the U.K., grew slower than expected, even with the acquisition of Britain's leading online reservation site, Toptable, under its belt.

In the second half of last year, its core U.S. business started to slow as overall restaurant traffic turned sluggish in the off-again economy.

"Overall revenue growth in the U.S. market slowed from the 40%-to-50% range to 20% most recently," said Raymond James analyst Aaron Kessler.

But that's still double-digit growth, not bad when you consider it's on a larger base.

Hurricane Sandy ate into fourth-quarter revenue by about $500,000, management estimated, as restaurants in the storm's path were forced to close.

"The good thing is, they are still growing," Kessler said. Analysts expect 2012 revenue to grow 16% over '11. Better yet, earnings are seen rising 30%.

The company reports year-end results in early February.

"There is still leverage in this model," Kessler said. And that, he added, "is driving faster earnings growth relative to revenue."

Diners can reserve tables for free through OpenTable's website and various mobile apps and partners. For each seat it fills this way, OpenTable gets paid $1 by restaurants. (OpenTable gets 25 cents a seat if a customer makes a reservation on a restaurant client's own website.)

"Reservations are typically for two or four people so we average about three people per reservation, so we make about $3 per reservation," said CEO Matthew Roberts.

Like a popular new restaurant, OpenTable (OPEN) enjoyed a strong two-year run from the time it went public in May 2009. Then the tables turned.

OpenTable is the top provider of online restaurant reservation services. At quarter's end, it had ties to 18,975 restaurants in North America and 7,385 internationally, mostly in the United Kingdom.

From its IPO price of 24.50, the stock hit a high of 118 nearly two years later while logging double-digit revenue growth and even higher profit gains.

OpenTable is the top provider of online reservations for restaurants such as the Waterbar in San Francisco. AP View Enlarged Image

But then the troubles started, sending shares to under 32 by the end of 2011. They've moved up more recently to around 52 as mobile reservations have shot up, but are still 56% off their all-time high.

CEO Exit

What happened? First, like a restaurant that had its star chef walk out, OpenTable's chief executive, Jeff Jordan, left unexpectedly in May 2011 to a venture capital firm.

Later, the company shuttered its discount deal program known as Spotlight, which never gained much traction.

More troubling, OpenTable's international business, led by the U.K., grew slower than expected, even with the acquisition of Britain's leading online reservation site, Toptable, under its belt.

In the second half of last year, its core U.S. business started to slow as overall restaurant traffic turned sluggish in the off-again economy.

"Overall revenue growth in the U.S. market slowed from the 40%-to-50% range to 20% most recently," said Raymond James analyst Aaron Kessler.

But that's still double-digit growth, not bad when you consider it's on a larger base.

Hurricane Sandy ate into fourth-quarter revenue by about $500,000, management estimated, as restaurants in the storm's path were forced to close.

"The good thing is, they are still growing," Kessler said. Analysts expect 2012 revenue to grow 16% over '11. Better yet, earnings are seen rising 30%.

The company reports year-end results in early February.

"There is still leverage in this model," Kessler said. And that, he added, "is driving faster earnings growth relative to revenue."

Diners can reserve tables for free through OpenTable's website and various mobile apps and partners. For each seat it fills this way, OpenTable gets paid $1 by restaurants. (OpenTable gets 25 cents a seat if a customer makes a reservation on a restaurant client's own website.)

"Reservations are typically for two or four people so we average about three people per reservation, so we make about $3 per reservation," said CEO Matthew Roberts.

In the third quarter, reservation fees generated 55% of the company's revenue. The rest came mostly from monthly subscription fees.

In the third quarter, the number of seated diners in North America rose 26% vs. the earlier year to 27.8 million. Including international, seated diners totaled 29.7 million. Both were slowdowns from the prior two quarters but above the year-earlier quarter's 23.6 million total.

How can OpenTable keep growing when restaurant industry traffic growth is virtually flat?

It's simple, says Roberts, who stepped up to the plate after former CEO Jordan left. Roberts had been chief financial officer for eight years.

"Even if people aren't going out to eat more, they are using our service more," Roberts said. "There's a general shift from phone reservations to online reservations."

And mobile is the fastest component of online reservations. The company's mobile bookings jumped 170% in the third quarter vs. the prior year and made up 32% of all North American bookings.

"Nonmobile isn't growing anymore," Kessler said. "Most of their growth at this point is from mobile."

OpenTable aims to tap into mobile more. It got off to a good start in the fall as one of the first companies to launch an app customized for Apple's (AAPL) new iPhone. And at a launch event, Apple showed how OpenTable is integrated into Apple's Siri personal assistant app.

In October, OpenTable launched a free service for restaurant customers that creates mobile-friendly websites for them.

"Only 10% of our restaurants have a mobile site optimized for viewing on a phone," Roberts said. "There's a big opportunity for them to present a compelling user experience to customers."

'Perfect Matches'

There's more to come. Like online dating sites, OpenTable is working to tap into its huge database to help diners "find perfect matches," Roberts said.

"We hired a fantastic chief technology officer who was the CTO at eHarmony," Roberts said.

Tapping into social media such as Facebook (FB) will be a key goal, Roberts says. It's "laid the foundation" by allowing customers to use Facebook to access OpenTable's website and mobile apps.

"We think there is an opportunity to add value for diners to see which restaurants their friends have eaten at and what their friends think about that restaurant, using Facebook's social graph data," Roberts said. "We're working on that now."

All these initiatives will drive growth in seated diners, he says.

With its already sizable restaurant-customer footprint, analysts see diner growth as especially key.

"They were focused too much on the blocking and tackling of adding new restaurants and not focused enough on finding ways of improving seated diner growth," said Piper Jaffray analyst Michael Olson. "They are taking steps to remedy that."

OpenTable already has about 50% share of reservation-taking restaurants in the U.S., "so it's more important to drive strong diner growth," Kessler added.

Seated diner growth in the company's core U.S. market slowed last year, Kessler says. He says it grew 43% in 2011 and about 27% in '12.

One reason may be relatively low awareness. "In our survey, only 40% of consumers have heard of OpenTable," he said.

He says OpenTable spends "very little" on advertising and "there is debate on whether they should spend more."

Meanwhile, the company is also focused on driving growth in three fledgling international markets: the U.K., Germany and Japan.

"We're early in North America and even earlier internationally," Roberts said.

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